In many business transactions, such as mergers and acquisitions, a portion of the transaction consideration may be held in escrow for some period of time. Such amounts are typically used, for example, to provide collateral for damages from breaches of representations and warranties, or to provide a reserve for expenses or third party claims.
Typically, these escrows have been managed as individual accounts of highly uncertain duration. As such, they generally are managed as funds needing to be immediately available despite the fact that such escrows are usually, in the aggregate, paid out in accordance with their planned, long-term scheduled expiration dates. In a normal yield curve environment, funds required to be immediately available are paid interest at the lowest levels of the interest rate curve, such as the federal overnight funds rate.
It has been long known that pooling assets minimizes risk. This is a key tenet in the practice of securitization. See, for example, U.S. Pat. No. 8,126,798 (Dolan et al.), which is incorporated herein by reference, for the securitization of margin loans. While securitization involves both pooling and repackaging the debts or assets, preferred embodiments of the present invention deal with extending the benefits of pooling to a class of assets that has not been pooled before. Because of the more predictable aggregate behavior, if a single entity manages multiple escrows as a pool, it would be desirable to obtain more favorable treatment of the deposits. Such a pool must, however, be carefully managed. While longer-temp investments can yield higher return, interest rate risk and credit risk can mean that principal can be lost. In most instances, parties to a merger or acquisition transaction have been willing to assume little to no risk of loss on the escrow deposit. Prior to the present invention, which provides computer-implemented tools to manage an escrow pool, this effectively meant that a pooling strategy with respect to such assets has not been possible.